KULR Technology Group Inc

AMEX:KULR

Earnings Call Transcript 2023-Q3

[Stuart Smith]

Welcome to the KULR Technology Group Third Quarter 2023 Earnings Call. I'm your host, Stuart Smith, and with me on the call today is the CEO of KULR Technology Group, that's Michael Mo. Company President and COO, Keith Cochran will be also joining us; and the CFO, the Chief Financial Officer, Shawn Canter.

As you probably know, KULR Technology Group is a publicly traded company listed on the NYSE American under the ticker symbol KULR. As such, before we begin the call today, please listen to the following safe harbor statement covering this call.

This call does not constitute an offer to sell or a solicitation of offers to buy any securities of any entity. This call may contain certain forward-looking statements based on management's current expectations, forecasts and assumptions that involve risks and uncertainties. Forward-looking statements made on this call are based on the information available to the management team as of the date hereof. The company's actual results may differ materially from those stated or implied in such forward-looking statements due to risks and uncertainties associated with the company's business, which include the risk factors disclosed in their Form 10-K filed with the Securities and Exchange Commission on March 28, 2023.

Forward-looking statements include statements regarding management's expectations, beliefs, intentions or strategies regarding the future, and can be identified by forward-looking words such as anticipate, believe, could, estimate, expect, intend, may, should, and would or similar words. All forecasts are provided by management on this call are based on the information available at this time, and management expects that internal projections and expectations may change over time.

In addition, forecasts are entirely on management's best estimate of their financial performance given their current contracts, current backlog of opportunities and conversations with new and existing customers about their products and services. KULR Technology Group assumes no obligation to update the information included on this call whether as a result of new information, future events or otherwise.

With that, I will now turn the call over to the CEO of KULR Technology Group, Michael Mo. Michael, the call is yours.

[Michael Mo, executive]

Thank you, Stuart. Thanks, everyone, for joining the KULR Q3 2023 earnings call. This is Michael Mo, I'm the CEO and Co-Founder of KULR Technology Group. .

I'm pleased to report that we achieved another record revenue quarter in Q3 of 2023. While our overall revenue grew approximately 120% year-over-year to over $3 million, our service contract revenue grew over 4,800% year-over-year. Our business model and customer engagement process start with design and testing services for our customers. We expect strong growth in our service contract revenue to be an early indication of our overall revenue growth potential, which will be driven largely by product sales rep.

Our KULR ONE platform continues to see strong growth in design services and product sales in energy storage, space, battery recycling and electric transportation markets. In addition, our proprietary thermal management products for the aerospace and defense markets are contributing to the acceleration of our growth into 2024. Our KULR ONE Space Battery of the KULR ONE 1 platform has received broad interest in Q4 across the board due to NASA levying heavy safety requirements on the CubeSat and SmallSat industry. As a result, the company has executed a contract to deliver a flight KULR ONE space unit for new customer account for a 2024 mission, and the program begins in Q4 of 2023.

Based on continued record quarterly growth and the broadening and deepening of our customer engagements across multiple market verticals, our sales funnel shows that our current 2024 revenue potential to be between $26 million and $34 million. Q3 growth is largely fueled by our KULR ONE platform, which is well positioned to serve multiple fast-growing multibillion-dollar markets where safety, performance and sustainability is of the utmost importance.

Here are some of the highlights of our achievements. KULR is selected by a top 5 American electric truck manufacturer to test analyze its next-generation batteries with the KULR ONE design solutions platform. This manufacturer has forecasted a substantial ramp-up in production of the electric SUV and truck over the next few years. According to research and markets, the U.S. electric truck market is expected to grow at a 54% CAGR to reach over $15 billion by 2030.

KULR and Cirba solutions announced a groundbreaking national recycling program for lithium-ion batteries and battery materials. The collaboration focused on developing a safe transportation platform for original equipment manufacturers to store, transport lithium-ion batteries by utilizing KULR SafeCASE and Cirba Solutions, nationwide logistics and recycling services. The collaboration between KULR and Cirba Solutions is an exclusive nationwide program. The global battery [indiscernible] markets project to grow to $54 billion by 2030.

KULR secured a third NASA order for automated battery cell testing service. The latest purchase order from NASA is part of a multiphase agreement for KULR's advanced automated battery cell screening system. In addition to NASA, we're engaged with electric aviation and battery cell companies to provide comprehensive self-testing service for their battery products. The global battery testing market is anticipated to reach over $7 billion by 2030.

KULR and Forge Nano formed a strategic partnership for enhanced battery safety and performance. This partnership will utilize KULR ONE Design Solutions platform to develop next-generation battery packs with Forge Nano's proprietary battery cell technology. The strategic partnership is estimated to be a $3.5 million to $5 million revenue opportunity.

Recently, the U.S. Department of Energy announced it intends to make available a second round of funding to support U.S. battery production and recycling. The announcement of this additional $3 billion in bipartisan infrastructure [ low ] funding is welcome us to American businesses seeking to produce North American main batteries. We expect this partnership to be well positioned to participate in U.S. Department of Energy programs.

We partnered with Velos Rotors to provide KULR [indiscernible] service as an added enhancement to Velos UAV drone platform to reduce vibration and also increase balance of the drone payloads that are highly sensitive to aircraft migration. By reducing the migration up to 90%, KULR VIBE significantly improved data quality and visual clarity for LiDAR and high-resolution optical cameras. KULR VIBE [indiscernible] is an important solution for the UAV drone market that's projected to reach $38 billion by 2028.

Next, our CFO, Shawn Canter, will go over Q3 financial highlights. Shawn?

[Stuart Smith]

Thank you, Mike. KULR posted another record quarter, the second in a row, adding to the record-setting revenue of the second quarter. Revenue for the quarter was approximately $3 million compared to approximately $1.4 million in the third quarter last year. This represents approximately 120% increase or more than doubling of revenue comparing the 2 periods. .

For the first 9 months of 2023, KULR generated approximately $7.5 million of revenue, compared to approximately $2.1 million in the first 9 months of 2022, for approximately a 245% increase or more than a tripling of revenue comparing the same periods.

Our product revenue this quarter was approximately $1.9 million, up about 38% from the same quarter last year. Our service revenue this quarter was approximately $1.1 million, up about 4,800% from the same quarter last year. As Mike mentioned earlier, our service revenue can be viewed as a foreshadowing of scalable product revenue opportunities.

Our gross margin for the third quarter was 44%, up from 33% in the same period last year. Achieving a gross margin in the mid-40s has been a goal of the KULR team. We continue to work to increase our gross margin based on revenue mix, pricing and additional scale.

Our revenue per paying customer in the quarter was almost $170,000, up approximately 94% versus the same quarter last year. For the 9 months ending Q3, our revenue per paying customer was over $200,000, up approximately 170%, with the number of paying customers growing to 37, up 28% from the same 9-month period last year.

Our revenue per employee in the quarter was approximately $43,000, which is up 14% from the second quarter and 70% from the first quarter of this year, indicating increasing human capital productivity.

Turning to capital allocation. We want to highlight that for the first 9 months of 2023 versus 2022, our cash used from operations is down approximately 20%, and our cash used from operations and investing combined is down approximately 26%, all while increasing revenue by about 245% or almost 3.5x.

We believe our focus on resource optimization and productivity is beginning to show in the numbers. Given what management sees today, we believe we are on track and comfortable with analysts' fourth quarter 2023 revenue estimates.

Stuart, that concludes our comments. I think we're ready for the questions now.

[Stuart Smith]

All right. Thank you for that, Shawn. I'm going to turn the call over now to Theodore O'Neill. He is the Principal of Equity Research at Litchfield Hills Research.

[Theodore O'Neill, analyst]

Congratulations on the good quarter. So you just touched on the customer question I was going to ask, your prepared remarks saying that you have increased number of customers. But in the last several quarters, you've had one customer has been responsible for about half of your revenue, and there are often no more than 3 customers that make up the majority of revenue. Is this part of the plan? Or as you're suggesting here, is there more diversity coming?

[Shawn Canter, executive]

Maybe I'll -- it's Shawn. I'll take that one. Thanks for the question.

[Stuart Smith]

If we could, we're getting some cellphone interference from you, if you could find a little...

[Shawn Canter, executive]

Our revenue, we expect it to grow 2 ways. Sure.

[Stuart Smith]

It sounds like it might be better. Go ahead and start with your response from the beginning, please?

[Shawn Canter, executive]

I would say, as we grow our revenue, we expect it to grow both by adding new customers, so that's customer diversity, and grow with existing [Technical Difficulty]. We believe we already [Technical Difficulty] seeing increased customer revenue diversity. And you can see that in our numbers -- period for example, ending September 30, customers representing more than 10% of the total revenue for the period went down from 81% to 69%, indicating increased diversity.

And it's worth noting again, we grew both revenue, up about 245%, and paying customers up about 28%. And maybe I'll just make one last point, which is that many of our customers who use KULR's patented products often rely on these products to satisfy their compliance and regulatory requirements. They need our products to satisfy those requirements so they can be in market. And so we believe that while certainly sometimes we can have a customer [indiscernible] any particular customer may be ramping up its own production and thus it needs more of our products, these relations can be very sticky. Maybe I'll leave it there.

[Stuart Smith]

Shawn, before we get to you again, this is Stuart, we will need you to move again to a better location, if you don't mind. I apologize for interrupting. Theodore, go ahead with your next question, please.

[Theodore O'Neill, analyst]

Yes, I was actually able to understand a fair amount of it. So that did answer that question. I was wondering also if you can give us an overview of your [ Cell Check ]platform and how you're planning to integrate AI into it.

[Terry Cochran, executive]

Yes, I'll take that one. Thanks a lot for your question there, Theodore. I appreciate it. Our [ Cell Check ] platform is designed to provide real-time information on the health of a battery path. And in addition, we use sensor information data to allow for deeper analytics for numerous factors such as degradation over time, looking for correlation of impacts of temperature changes, versus performance capability, et cetera.

So of course, now that there's much easier access for using AI to analyze multiple data points simultaneously, we'll use that to help draw opportunities for product enhancement. So AI will be used for the analysis of our data, but not actually integrated into the hardware, if that makes sense. But with that said, we do have AI integrated into our KULR VIBE platform, and that's in our software. And this allows for real-time algorithm adjustments to be made that further refine our ability to provide the optimal solution to achieve incredible check and balance for those.

[Theodore O'Neill, analyst]

Okay. And the Army contract you announced on October 30, which is being extended, you said October 30, you said would be extended. When it goes into production, what's the opportunity there for KULR?

[Michael Mo, executive]

Yes. Thanks, Theodore. This is Michael. I'll take that. So the current contract is a development contract in nature, and it extended. And we expect to have other development contract on top of that. The prototype production likely start late 2024, into 2025. We started with Army on airborne and UPS applications. Army is very interested in increasing the power and energy density of the lithium-ion battery. But lithium-ion battery safety is a top concern. As you may know that they're one of the largest consumer batteries in the world.

So once we can prove out the lithium-ion battery that we produce to them is safe and meet their energy needs, we believe the opportunity opens up from the current approximately about $100 million opportunity for these applications to a much, much larger opportunity across the Army platform.

[Stuart Smith]

Thank you, Theodore. We'll now move on to Managing Director and Senior Research Analyst at Alliance Global Partners. That's Jake Sekelsky.

[Unknown Analyst]

Starting with the contract announcement with the American EV truck maker. And I recognize that specifics haven't been disclosed. I'm just wondering what the time line might look like from the testing phase to the product implementation phase. I know sometimes it's tough to gauge when partners are larger parties. But I'm just curious what your thoughts are here.

[Michael Mo, executive]

Yes. We have started engaging with the customer, and we're likely to perform the test in Q4 of this year. So that's the quarter we're in right now, and going to 2024. And based on the test results, and we will continue our engagement with the customer after we have the chance to analyze those results. .

[Unknown Analyst]

Okay. So you guys, it sounds like you're hitting the ground running there. And then, Shawn, I think you touched on this a bit, but it looks like cash consumption has come down quite a bit year-over-year, while you were still able to continue to grow revenue. I'm just curious if you feel there are any additional areas where expenses could be cut further without sacrificing growth obviously heading into next year?

[Shawn Canter, executive]

Sorry, they just patched me in to my phone to try to get a better connection. Can you just give me the question one more time?

[Unknown Analyst]

Yes, no problem. So I was just saying, you touched on this earlier on cash consumption coming down a bit year-over-year, without sacrificing revenue growth, obviously. I'm just curious if you guys feel like there's any additional areas where you could cut some expenses further without sacrificing growth heading into next year.

[Shawn Canter, executive]

Sure. Well, I can tell you that we are constantly reviewing all of our processes and procedures and we'll continue to do that in order to become more and more efficient. I think that, in addition to that, as we are growing and gaining scale, I think we'll be able to continue to improve our margins, and you'll see those hopefully continue to improve as we move forward. So while we've done a lot of work so far, I think this is focusing on growing and focusing on optimizing our resources across our various platforms will continue.

So there's no specific area we're targeting. We're always looking at all the areas and how we can run more leanly and efficiently.

[Terry Cochran, executive]

Shawn, let me just add on there. This is Keith Cochran, and thanks for the question there, Jay. The other thing to keep in mind is most of our product revenue is variable cost. In other words, we use outsourced manufacturing for that. So we're able to scale without a lot of significant investment into machinery and personnel. So we can flex that up and down on a variable cost basis. So that's one of the strategic approaches we started from the beginning.

[Stuart Smith]

And now we're going to welcome Michael Legg Sr. He's the Managing Director of Benchmark and Emerging Growth Research.

[Unknown Analyst]

Can we talk -- contract service revenues came in strong, R&D was up a little. But R&D is also an indicator of future revenues, I believe, Shawn. I think we talked about that. Can you first talk a little bit about the R&D pipeline or customer opportunities there, if it's say anything different than what we have in contract services?

And then on the SG&A decline, down to 4.8 from 5.6 last quarter, can you talk where you cut those expenses out and what you're doing there. And then the ability to keep SG&A at these levels?

And then just lastly, can you talk a little bit about the cash position, the cash flow and any types of cash inflows and outflows we have coming up near term and how we're going to handle that?

[Shawn Canter, executive]

Sorry, Mike, a lot of questions in there. So I think the first one was about R&D and how that is an indication of growth. And so yes, I think -- and Mike and Keith obviously jump in here, too. But our R&D expenses are associated with the work that we are doing in order to satisfy the increasing customer demand pull that we're seeing and going after those contracts and going after those solutions that those customers demand from us.

So I think you're right. I think that, while we certainly are -- as I mentioned for Jake, we certainly are cognizant of maintaining our -- trying to keep our costs as lean as possible. What we don't want to do is we don't want to sacrifice growth. And so where appropriate, we will invest in satisfying that customer demand.

I think the second question was around SG&A. Yes. And so on that front, as I said, we continue to look at all of our processes where we can reduce cost or improve efficiency, which results in cost savings. We will continue to do that.

[Terry Cochran, executive]

Let me jump in on this a little bit. This is Keith Cochran here. Yes. One of the things that we've been able to do on is really cut some of our marketing costs. And the reason we're able to do that is we're starting to get very good brand recognition out of the industry. And we're getting to a point now that we're kind of full, if you know what I mean. We're really not having to beat the doors down of other OEMs. They're coming to us proactively in some of the most recent large announcements that we've made have been from people that have actually come to cooler to CCAR capabilities.

So marketing is an area that we've been able to really reduce costs. That's sustainable, at least for the foreseeable future. So now we're taking that capital and redeploying that back into R&D.

And then on the R&D side of the business, we're getting great leverage from the last 2.5 years of investment that we've made in the KULR ONE platform. And so what we see there is we're able to get much more efficient with those R&D dollars because, from one battery pack to the next battery pack, we're starting to get into situations where it's almost a replication of previous work done. So that improves the efficiency. So just kind of -- I hope that answers your question a little bit.

[Unknown Analyst]

Yes. No, that's perfect. And then just on the cash and the cash uses coming up, can you just go over that and where we stand? .

[Shawn Canter, executive]

Thanks, Keith. Yes. So in terms of cash, we continue to -- as you grow the business, optimize our cost. So between our cash, our receivables, our -- to current visibility in terms of what the pipeline looks like, our various partnerships and initiatives, we feel like we have -- we're in a good position to continue to finance the growth of the business and we'll continue to use cash flow generated internally. And to the extent that external financing is appropriate, we'll do that to continue to meet the growing customer demand that we're experiencing.

[Unknown Analyst]

Congrats on the quarter.

[Stuart Smith]

Next, we have questions from Howard Halpern. He is a senior equity analyst with Taglich Brothers. Unfortunately, Howard is not available to ask his questions today, so I will do my best to play the part of Howard. Here's the first question. Do you believe the most recent announcement with Velos to provide your KULR VIBE service as an added enhancement to the Velos V3 UAV helicopter will provide you with an opportunity to accelerate the rollout of this offering to other helicopter companies as well as branch out into other verticals.

[Terry Cochran, executive]

Guys, I'll take this one. And first off, I want to say Velos is just a great partner, and we really enjoy working with them. So thanks to the Velos team. We appreciate them a lot. And also, thanks for the question.

So to answer your question, the answer is an unequivocal yes. In fact, just this week, we had a very positive meeting to display the KULR VIBE capabilities for drone OEM. So a little diversity there away from the helicopters and into the drone space, of which we've been placed for quite a while. But yes, we're getting interest from OEMs in the drone space.

We're using our wireless sensing technology. We are deployed into Velos aircraft now. And as for standard helicopters, KULR uses the [ onboard ] sensor data to define the solution to provide optimal track and balance, allowing for our customers to use the technology simply by calling in the sensor readings to us over the phone.

We also have adopted the technology to run on iOS and Android platforms so we can load that onto tablets for the folks that are out in the field needing to use our technology.

[Stuart Smith]

All right. Can you talk about how your relationship with Ford Nano is progressing? And what are the long-term opportunities?

[Michael Mo, executive]

Yes, I think that -- Forge Nano makes their batteries with a special coating technology [indiscernible]. So the partnership is to use our safe screening line to help them categorize their batteries, and they're getting more data on performance out of those battery cells. And then we use our KULR ONE Design Solutions to make battery packs with their [indiscernible] joint partners and customers. So this is a great synergistic opportunity for us. As I mentioned earlier, there's also the new DOE program that build specialty battery cells in the U.S., that's about $3 billion. And I think that our automated cell screening line is a perfect fit to incorporate into their mega-factory to participate into these grant applications.

So it starts with about a $3.5 million to $5 million opportunity and -- for the next couple of years. And I think that they can grow much more substantially once they have the factory up and running.

[Stuart Smith]

All right. The next question is, how are your new facilities performing in terms of driving your time line from design to deployment?

[Terry Cochran, executive]

Well, the facilities are performing very well, and we've added capabilities to further improve our time to market. We have added in new [ CNC ] equipment, 2 3D printers, tab welders, and [ Arvid ] battery cycler as well as additional tooling, also having our own battery cell testing and capabilities and family owned, we can expedite our pack prove out testing as we need to. We're in full control of the facility. This provides a significant advantage by reducing the lead times with outsourced suppliers. So we thought that was critical for us to invest in in-house infrastructure for this.

[Stuart Smith]

All right. Shawn, I know you touched on this in Michael's question above, but let's talk about the status of your capital position relative to driving operational breakeven.

[Shawn Canter, executive]

Okay. Well, I guess the first thing I should say, and I'm sure it's clear -- it's obvious to everybody, is we're working very hard to get to an operational cash breakeven point as quickly as we can. And I guess this is evidenced by the growth trends that we've put up and people that we've noted earlier and our continued efforts, as we've previously talked about, to optimize our cost structure.

We continue to work on growth. We continue to work on resource optimization. And I guess we -- I think we have a good line of sight to having operational breakeven in we think, potentially in the second quarter of next year. Obviously, we'll have to meet certain milestones, which I can't guarantee we will, but we think that they're very much possible based on what we see today and the revenue visibility, the pipeline, the various customer partnerships we have and certain initiatives that are in place.

And so we're working very hard to get there as quickly as we can. Obviously, that would be a big milestone for KULR and the team. And so we'll continue to work towards that goal.

[Stuart Smith]

All right. And Howard's final question is, how is the company attempting to drive brand awareness of their thermal runway shield offering in order to prevent tragedy such as a fire that killed 3 generations of New York City family? It was sparked by a lithium-ion battery used to power an electric [ skewter ], one of the victims there. This is pulled from a New York Post headline yesterday, November 13. So that is his question. How is the company attempting to drive brand awareness of their thermal runway shield offering?

[Terry Cochran, executive]

Well, first off, we're really sad to hear about the tragedy, and we are aware that -- and I think the core mission of KULR is to make safer battery products. And I think, Howard -- I know you're well aware of the KULR SafeCASE products as well as our thermal management capabilities here. But yes, that's a core mission for KULR's to save lives and prevent these types of tragedies.

We discreetly work that with regulatory agencies. We certainly don't want to be seen as somebody that's taking advantage of a tragedy. So when we do our advertising and so forth, we do that directly with folks that control the regulatory environment. So those are a little bit more behind the scenes. It's not to drive industry awareness. We think we're doing that pretty well already. We have a variety of customers already consuming our SafeCASE products. And so I think we have pretty good brand awareness there now. But what we're trying to do is improve the situation with the regulatory agencies and bring awareness of our products to them.

[Stuart Smith]

All right. Very good. As I mentioned, that was the final question. I would like to thank Michael Mo, Keith Cochran and Shawn Canter of KULR Technology Group. And of course, they would like to thank all of you for joining us on the call today.

Thomas, as our operator, I will now turn the call over to you to close it out.

[Operator]

Thank you very much, and thank you once again for your participation today. You may disconnect at this time, and have a wonderful day. Thank you once again for your participation.